How to understand silent seconds, deferred, and forgivable loans for down payment assistance

Down payment assistance can be a free grant, or it can be a loan that is enough to cover a 3.5% or 4% down payment on a home. Many housing agencies offer higher amounts to also cover closing costs and/or home repairs.

Loans might be in the form of a silent second mortgage, also known as a “soft second.” They are called silent because you don’t even notice it’s there. Typically, such loans are zero percent interest, and require no repayment until the home is sold or refinanced. Sometimes lenders charge a very low rate of interest rate, such as 2%.

Deferred payments. Your agency might offer you a loan whereby payments are deferred for the first few years. Let’s say you can obtain $6,000 at zero-percent interest, where payments are deferred for 36 months. If the loan is structured on a five-year term, this means that after three years, you’ll be paying $100 per month for a period of 60 months.

Forgivable Loans. Many housing agencies offer down payment assistance loans which are “forgiven” within a specified period of time. Each year that you live in your home, a certain portion of the loan balance is reduced. Here’s an example. The housing agency offers a 3-year forgivable loan in the amount of $3,600. At the end of 12 months, the balance has reduced to $2,400. At the end 24 months, the balance has reduced to $1,200. At 36 months, the loan balance is zero.

Everything you need to know about down payment assistance is explained in Chapter 1, “Ten Ways to Cover Your Down Payment.”

Housing Finance 2020 includes over 900 weblinks to grants and down payment resources.

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